WASHINGTON — The Federal Reserve's vice chairman, Donald Kohn, has warned investors not to underestimate the Fed's inflation concerns and challenged the wagers of some traders that interest rates may be cut.

Kohn said in a speech late Wednesday that he was more worried about persistent inflation than a slowdown in growth. He told a gathering of economists and money managers in New York that the economy was likely to avoid recession and that a pickup in prices would warrant higher borrowing costs.

"Don't sell the Fed's concern about inflation short," he said in response to questions after the address. "Further upward movements in inflation would be very adverse to the economy and would, I think, require policy actions."

The remarks by Kohn, who has worked at the Fed since 1970 and served as chief strategist when Alan Greenspan was chairman, are at odds with speculation that a housing slump would prompt a rate cut by early next year.

The Fed chairman, Ben Bernanke, said Wednesday that the U.S. property market was in a "substantial correction" that would trim about a percentage point off economic growth in the second half and restrain expansion next year.

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"What he's saying is the Fed's on hold and is watching the data," said Ethan Harris, chief U.S. economist at Lehman Brothers. "Ultimately, the Fed has to make up its own mind."

Like Kohn, Bernanke cited persistent inflation as a risk. Bernanke's remarks were in response to a question after a speech in Washington about the fiscal challenges of an aging U.S. work force. Kohn's address and subsequent answers to questions were devoted to the outlook for the economy and monetary policy.

"The risks to my outlook for economic activity may be skewed to the downside, while those to my forecast of gradually declining inflation are tilted to the upside," Kohn said. "In the current circumstances, the upside risks to inflation are of greater concern."

Some traders interpreted Bernanke's comments as consistent with a possible rate cut and pushed stocks higher.

"You can wonder whether Kohn has a different view of the economy or whether they share the same view and Kohn's views are directed at the market to address the market's earlier misperceptions of Bernanke's remarks," said Russ Koesterich, senior portfolio manager at Barclays Global Investors in San Francisco. "Did the markets interpret Bernanke's comments as too dovish, and is Kohn trying to correct that?"

Kohn said the current overnight lending rate level of 5.25 percent has the best chance of fostering a soft landing. He predicted that the economy would continue to slow before picking up and that retreating oil prices will allow consumers to spend more.